Nine Tax Benefits for Parents

When working on your taxes this year, there are still many areas for deductions, exemptions, or itemized deductions.

Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012.   For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.
2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.
3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.
4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.
5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.
6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.
7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.
8. Self-employed health insurance deduction – If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.
9. 529 Plans – If you fund a 529 Educational plan for a child, it grows tax deferred and thus avoids annoying annual tax filings.  You can also check out Coverdell ESA or other educational plans. A Roth IRA can be used if the child has earnings.

Forms and publications on these topics are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• EITC Assistant
• Publication 596, Earned Income Tax Credit.
• Publication 501, Exemptions, Standard Deduction and Filing Information
• Schedule 8812, Child Tax Credit
• Publication 972, Child Tax Credit
• Publication 503, Child and Dependent Care Expenses
• Form 8839, Qualified Adoption Expenses
• Publication 970, Tax Benefits for Education
• Affordable Care Act Tax Provisions

IRS YouTube Videos:

• Earned Income Tax Credit – English | Spanish | ASL
• Education Tax Credits and Deductions – English | Spanish | ASL

IRS Podcasts:

• Earned Income Tax Credit – English | Spanish
• Education Tax Credits and Deductions – English | Spanish

IRS Tax Tip 2013-11, February 11, 2013

About the Editor:  Dr. George Mentz is a world recognized consultant and award winning professor who has authored several revolutionary books.  Prof. Mentz, an international lawyer, has been a keynote speaker globally in Asia, Arabia, USA, Mexico, Switzerland, and in the West Indies.   Mentz can be contacted for speaking engagements at www.gmentz.com  or www.managementconsultant.us  or www.selfhelpbook.org *No tax, insurance,  investment or legal advice provided herein.  Please consult with a licensed professional in your jurisdiction before making any important financial or legal decision.

Valuation discounts are increasingly challenged by the IRS. Gone are the days when assets could be dropped into a family limited partnership with some transfer restrictions and forgotten about until a valuation discount was needed to reduce a gift or estate tax bill.  A recent U.S. District Court case, Fisher v. U.S., reminds us that times have changed.  Often, placing assets in a business entity is no longer enough to justify a valuation discount—the entity must be run like a business to justify the discount.   Read the analysis by our experts Robert Bloink and William Byrnes located at AdvisorFX Journal Valuation Discounts: Only for a Bona Fide Business

For some good news about valuation discounts, see our article in AdvisorFX Advisor’s Journal on the Jensen case.

From a tax perspective see Tax Facts Q 613. How is a closely held business interest valued for federal estate tax purposes?

After reading the analysis, we invite your questions and comments by posting them below, or by calling the Panel of Experts.

The IRS has dropped the second shoe, giving taxpayers guidance through the complex procedural machinations they must follow to avoid the 2010 estate tax.

The IRS released two pieces of guidance for estates of 2010 decedents. Advisor’s Journal covered Notice 2011-66 in a previous edition [see IRS Finally Issues Guidance on 2010 Estate Tax (CC 11-160)]. Today we discuss the second component, Revenue Procedure 2011-41, which provides a safe-harbor for executors of estates of 2010 decedents and beneficiaries of those estates. If the safe-harbor procedure is followed and the executor doesn’t take a contradictory position on a return, the IRS will not challenge the election against the estate tax or the basis allocations made by the executor.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of estates of 2010 decedents in Advisor’s Journal, see IRS Finally Issues Guidance on 2010 Estate Tax (CC 11-160), What Next? ILITs and Estates under 5MM (CC 11-114), & Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122).

For in-depth analysis of the estate tax, see Advisor’s Main Library: Estate, Gift and GST Taxes

When an estate is facing a liquidity crisis, why not tap the family limited partnership (FLP) for cash? After all, the decedent was a partner in the partnership and the partnership can make distributions to the estate, which is now a partner in the FLP.

No so fast. Although an FLP may look like a prime source of cash for paying an estate tax bill, the move can come back to bite the estate in a big way. Done the wrong way, it could jeopardize the valuation discounts and estate planning objectives your clients and their estate planning professionals worked so hard to secure.

The IRS is perpetually on the lookout for new weapons to use against FLPs, but Section 2036 of the Internal Revenue Code has been the IRS’s weapon of choice against FLPs over the past decade.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of family limited partnerships in Advisor’s Journal, see Use Charitable Giving to Enhance Family Business Succession Planning (CC 10-76) and
Practical Succession Planning for the Family-Owned Business (CC 08-22).

For in-depth analysis of family limited partnerships, see Advisor’s Main Library: FF—Family Limited Partnership.

The National Underwriter Company Presents:

Advanced Markets Case Study

Beginning next month The National Underwriter Company will begin its case series for wealth managers. The case studies will be in addition to our daily articles. Check back in September to see the new content.

The case studies have expert commentary and analysis to help wealth managers with common planning issues.

Here’s a sneak peak of what is to come…

A charitable freeze technique that used a complex contribution formula was considered by the Ninth Circuit Court of Appeals in Petter v. Commissioner, No. 10-71854 (2011). The charitable freeze is a technique that readjusts a simultaneous gift/charitable contribution combo if the IRS successfully challenges a valuation of the gift, shifting additional value from the gift component to the charitable contribution component to eliminate any gift taxation resulting from the challenge.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of estate planning in Advisor’s Journal, see What Next? ILITs and Estates under 5MM (CC 11-114).

For in-depth analysis of estate freeze techniques, see Advisor’s Main Library: E—Estate Planning For The Family Business.

Estates of decedents who died in 2010 finally have guidance from the IRS on how to opt out of estate tax treatment and allocate carryover basis to estate property. The guidance is long overdue, and leaves little time for estates to make decisions that could have a massive tax impact.

Under the guidance, Notice 2011-66, to opt out of the estate tax and apply the new carryover basis rules, an executor must file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. The due date for the form is November 15, 2011. But despite the November deadline, Form 8939 and its instructions will not be available until early this fall. The IRS has, however, released a draft version of the form.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the new estate tax in Advisor’s Journal, see What Next? ILITs and Estates under 5MM (CC 11-114), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), 2010 Estates: To Elect or Not to Elect (CC 10-124) & Obama Tax Agreement Passed by House (CC 10-117).

For in-depth analysis of the estate tax, see Advisor’s Main Library: Estate, Gift and GST Taxes.

Why is This Topic Important to Wealth Managers? This blogticle serves as a reminder and review of the treatment of deceased estates from 2010 (making an a section 1022 election).

Estate Tax

The IRS recently published guidance [1] with regard to the time and manner in which the executor of the estate of a decedent who died in 2010 elects, pursuant to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, [2] (TRA), to have the estate tax not apply and to have the carryover basis rules in section 1022 apply to property transferred as a result of the decedent’s death.

Generally, subtitle A of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001, [3] (EGTRRA) enacted section 2210, which made chapter 11 (the estate tax) inapplicable to the estate of any decedent who died in 2010 and chapter 13 (the GST tax) inapplicable to generation-skipping transfers made in 2010.

On December 17, 2010, TRA became law, which reinstated the estate and GST taxes.  However, section 301(c) of TRA allows the executor of the estate of a decedent who died in 2010 to elect to apply the Internal Revenue Code (IRC) as though section 301(a) of TRA did not apply with respect to chapter 11 and with respect to property acquired or passing from the decedent (within the meaning of IRC section 1014(b)).  Thus, TRA allows the executor of the estate of a decedent who died in 2010 to elect not to have the provisions of chapter 11 apply to the decedent’s estate, but rather, to have the provisions of section 1022 apply (Section 1022 Election).

Even though an executor may elect out of the estate tax under TRA, the provisions of chapter 13 (GST tax) nonetheless continue to apply.  Nevertheless, TRA, provides that the applicable tax rate for each GST occurring during 2010 is zero.  [4]

TRA also retroactively repealed section 2511(c), which treated each transfer in trust during 2010 as a gift unless the trust was treated as wholly owned by the donor or the donor’s spouse.  Because of this retroactive repeal, this section does not apply even if a Section 1022 Election is made.

GST

The GST tax was retroactively reinstated by TRA and applies to the estates of all decedents who died after December 31, 2009, regardless of whether a Section 1022 Election is made.  The GST tax is computed by multiplying the taxable amount by the applicable rate. [5]

Under the TRA the maximum federal estate tax rate for purposes of computing the GST tax on such a transfer is deemed to be zero which, when multiplied by any inclusion ratio, will result in an applicable rate of zero.  As under the law applicable to GSTs occurring prior to 2010, the only way to achieve a zero inclusion ratio for the transfer is to make a timely allocation of GST exemption to the transfer.

Next week’s blogticles will discuss planning opportunities.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

[2] See section 301(c) TRA, P.L. 111-312 (124 Stat. 3296)

[3] P.L. 107-16.

[4] Section 302(c) of TRA.

[5] IRC Section 2602.

The IRS has released guidance [Rev. Proc. 2011-38] that substantially liberalizes the rules for partial exchanges of annuity contracts.

Section 1035 allows a tax-free exchange of an annuity contract for another annuity contract. Congress introduced the tax-free exchange because it recognized that the needs of life insurance and annuity owners change over time and that it would be unfair to tax them when they switched policies to better meet their needs.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of Section 1035 exchanges, see Advisor’s Main Library: E – Non-Taxable 1035 Exchange of Contracts. See also, Advisorfyi.com, Income Tax: Partial Annuity Exchanges Under Section 1035

Partners in a partnership and members of an LLC taxed as a partnership cannot have individual SEP IRAs (Simplified Employee Pension Individual Retirement Account) plans, according to the IRS.

Only employers are allowed to maintain SEP plans for their employees. Because partners are employees of the partnership for retirement plan purposes, they cannot have an individual SEP plan. If partners in a partnership wish to utilize a SEP plan, the partnership as an entity must maintain and contribute to the plan for the partners.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of IRAs in Advisor’s Journal, see Qualified Charitable Distributions from an IRA (CC 11-03) & How Are IRA Owners Investing Their Money? (CC 11-112).

For in-depth analysis of SEPs, see Advisor’s Main Library: IRAs and SEPs.